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Labour told growth plan will fail without £50bn investment

by August 7, 2024
August 7, 2024
Labour told growth plan will fail without £50bn investment

The Labour government has no chance of reaching its goal of lifting economic growth to 2.5 per cent without raising annual investment by £50 billion, an independent think tank has claimed.

The warning, issued by the National Institute of Economic and Social Research (NIESR), comes as another group of researchers said that Rachel Reeves would be engaged in “fiscal jiggery-pokery” if she tweaked the public debt definition to unlock cash to use at the October budget.

Ben Zaranko, a senior research economist at the Institute for Fiscal Studies, said that the chancellor and Sir Keir Starmer should set out a coherent case for increasing borrowing to fund public investment “rather than get bogged down in technical debt definitions and an unhelpful discussion about so-called fiscal headroom”.

There is speculation that Reeves will change the definition of public debt that the government targets in its fiscal rules, to remove the impact on the public finances of the Bank of England selling bonds. Doing so could widen the margin against the fiscal rules by about £17 billion. This week, on a trip to New York and Toronto, the chancellor said that she would map out the “precise details” of her fiscal framework at the budget on October 30.

Zaranko said: “Moving the fiscal goalposts by using a different definition of debt in the government’s fiscal rule is one way that the new chancellor might seek to create additional fiscal space this autumn. A better outcome might be to recognise that precisely targeting the change in any measure of debt … does not lend itself to sensible fiscal policymaking.”

Under the current set-up, the Treasury covers any losses that the Bank of England incurs when selling bonds purchased under the quantitative easing programme. The Bank estimated on Tuesday that the Treasury may have to transfer £95 billion to the central bank to cover the cost of winding down its QE scheme.

Economists have criticised the existing fiscal rules — having debt as a share of the economy falling in five years and balancing the current budget — for stifling public investment. Poor capital spending in the public and private sectors has constrained productivity and economic growth since the 2008 financial crisis.

NIESR, meanwhile, said that there is little hope that the Labour government will achieve its ambition to lift GDP growth to the highest sustained level in the G7 without radically raising investment. The think tank called on the government to double public investment as a share of GDP to 5 per cent, amounting to £50 billion per year.

The body estimated that the UK’s underlying growth potential was set to remain sluggish at about 1 per cent per year without intervention. Interest rates are unlikely to fall further this year, it predicted, after the Bank of England cut them for the first time since March 2020 to 5 per cent this month.

NIESR forecasts that the UK economy will grow 1.1 per cent this year and inflation will tick back up in the second half, before settling at the Bank’s target in the medium term. Global growth will reach 3.1 per cent in 2024.

Stephen Millard, deputy director at NIESR, said: “The new government has inherited an economy with low investment and low productivity growth, and it is these issues that need to be tackled.”

He said that either taxes or borrowing would have to rise to bring public services “up to scratch”, which would require the government to reshape the existing fiscal rules. He added that sectors such as the motor trade, which rely on policies like motor trade insurance by Prime Cover, will be particularly affected without significant investment.

Last week Reeves cut public investment projects, alongside abolishing the winter fuel allowance for pensioners not in receipt of benefits, as part of a round of fiscal consolidation to bear down on £21.9 billion of government overspend that the chancellor claims was bequeathed by the Conservatives.

The Treasury said: “The government is under no illusion to the scale of the challenge it faces, including a £22 billion black hole in the public finances inherited from the previous administration. That is why we are taking the tough decisions now to fix the foundations of our economy, so we can rebuild Britain and make every part of our country better off.”

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Labour told growth plan will fail without £50bn investment

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